2022 (4) TMI 1379 - AT - Income Tax

Penalty u/s 271C - non-deduction of tax at source from the payment of harvesting charges paid to contractors - whether there exists reasonable cause for default trigger penalty proceedings? - HELD THAT - Penalty section 271C and section 273B, we find that the word 'shall' is used in section 271C prima-facie makes it clear that imposition of penalty is mandatory, nonetheless it reveals the imposition of penalty is non-discretionary. Au contraire the word 'shall' used u/s 273B provides that, it is mandatory not to impose penalty if the assessee establishes the existence of reasonable cause for its failure in compliance of provision of chapter XVII-B of the Act. That is to say, even if the assessee make itself liable for penalty for violation of chapter XVII-B of the Act, provision of section 273B acts as immune on reasonable cause in the give circumstances. To our limited knowledge, there is no definition of the term reasonable cause , and it has to be decided upon the facts of each case or a situation that would stimulate or encourage a person of ordinary intelligence under the given facts and circumstances to believe, based on observations or conversations to be not applicable or applicable as the case may be. In this regards it apt to quote the decision in the case of CIT Vs M/s Eli Lilly Company (India) Pvt. Ltd. Ors 2009 (3) TMI 33 - SUPREME COURT with regards to reasonable cause for failure to deduct TDS, the Hon ble Lordship on the scope of Section 271C r.w.s 273B. The expression reasonable cause gives the impression that prima facie, if a person of average intelligence has acted and under those circumstances the said action was at that point of time not infringed the settled law then it can be reasonably held that assessee was prevented by a reasonable cause under those circumstances not to act as prescribed or determined by a case law. We are aware that ignorance of law is not an excuse but at the same time, it is not practical that every taxpayer should always be aware about the latest development of fiscal laws; which are ever and fast changing. We find that, the issue at hand was highly debatable at relevant point of time and assessee was prevented by a reasonable cause for not complying with the provisions of chapter XVII-B of the Act, ergo placing reliance on the judgement of Hon ble Apex Court in CIT Vs M/s Eli Lilly Company (India) Pvt. Ltd. Ors (Supra), we are of considered view that, the appellant assessee is entitled to relief from 271C penalty by virtue of provisions of section 273B Act, on the aforestated reasoning, consequently penalty levied u/s 271C. - Decided in favour of assessee.

Summary

Issues Involved:
1. Liability under Section 271C of the Income Tax Act, 1961 for failure to deduct tax at source (TDS) under Section 194C.
2. Reasonable cause for non-deduction of TDS.
3. Interpretation of "reasonable cause" under Section 273B of the Act.

Issue-wise Detailed Analysis:

1. Liability under Section 271C for Failure to Deduct TDS under Section 194C:
The primary issue in the appeals was whether the appellant assessee was liable for a penalty under Section 271C for not deducting TDS from payments made to harvesting contractors under Section 194C of the Income Tax Act, 1961. The appellant argued that the harvesting charges formed part of the purchase price of sugarcane and thus were not subject to TDS. The appellant also contended that the payments were made on behalf of farmers and were agricultural income, which is exempt from TDS. However, the tax authorities, including the Additional Commissioner of Income Tax (TDS) and the Commissioner of Income Tax (Appeals), rejected these arguments, holding that the payments were contractual and thus subject to TDS under Section 194C.

2. Reasonable Cause for Non-deduction of TDS:
The appellant claimed that there was a reasonable cause for not deducting TDS, citing divergent judicial precedents and legal advice. The appellant relied on the decision of the Bombay High Court in CIT v. Dwarkadheesh Sakhar Karkhana Ltd., which held that there was no liability to deduct TDS on harvesting charges as they formed part of the sugarcane price. The appellant argued that this created a bona fide belief that TDS was not required. The tax authorities, however, did not accept this explanation and imposed penalties equivalent to the amount of tax not deducted.

3. Interpretation of "Reasonable Cause" under Section 273B:
The Tribunal examined the provisions of Section 271C and Section 273B of the Act. Section 271C mandates a penalty for failure to deduct TDS, while Section 273B provides that no penalty shall be imposed if the assessee proves that there was a reasonable cause for the failure. The Tribunal noted that "reasonable cause" is not defined in the Act and must be interpreted based on the facts and circumstances of each case. The Tribunal cited the Supreme Court's decision in CIT v. M/s Eli Lilly & Company (India) Pvt. Ltd., which held that the imposition of penalty is not automatic and that reasonable cause must be considered.

The Tribunal found that the appellant had acted based on a bona fide belief, supported by judicial precedents, that TDS was not required on harvesting charges. The Tribunal also noted that the appellant had started deducting TDS from the financial year 2016-2017, indicating a change in understanding and compliance with the law. Given these circumstances, the Tribunal concluded that the appellant had a reasonable cause for not deducting TDS and was entitled to relief from the penalty under Section 273B.

Conclusion:
The Tribunal allowed the appeals, holding that the appellant had a reasonable cause for not deducting TDS on harvesting charges. The penalties imposed under Section 271C for all the assessment years under consideration were directed to be deleted. The judgment emphasized the importance of considering reasonable cause and bona fide belief in penalty proceedings under the Income Tax Act.